Differences between fixed and adjustable rate loans

A fixed-rate loan features the same payment amount for the entire duration of the mortgage. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payment amounts on your fixed-rate mortgage will increase very little.

Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. That gradually reverses as the loan ages.

You might choose a fixed-rate loan to lock in a low interest rate. Borrowers select these types of loans because interest rates are low and they wish to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a good rate. Call 1st Credential Mortgage Inc at (281) 778-0805 for details.

There are many different types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.

Most programs have a "cap" that protects borrowers from sudden monthly payment increases. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount your monthly payment can go up in a given period. In addition, almost all ARM programs have a "lifetime cap" — this cap means that your interest rate can't ever go over the capped amount.

ARMs usually start out at a very low rate that usually increases as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are often best for people who anticipate moving within three or five years. These types of adjustable rate programs benefit people who will move before the loan adjusts.

You might choose an ARM to get a lower introductory rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky when property values go down and borrowers cannot sell or refinance.

Have questions about mortgage loans? Call us at (281) 778-0805. We answer questions about different types of loans every day.

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